The current bear market has hit many stocks pretty hard, but it's been especially brutal to the e-commerce sector. And shares of Chewy (CHWY 4.22%), an online retailer of pet foods and supplies, have taken their fair share of beating as well.
Many investors are staying away from Chewy because of the drop in its share price, some are dismissing the company as a pandemic play, and some are concerned about how the company will fare if the economy continues to slow down. Taking a closer look at Chewy's business, however, suggests that investors' concerns could be misguided.
Let's see why pessimistic investors might be missing out on an excellent long-term investment opportunity, and also, potentially a recession-proof stock that could offer solid downside protection as the economic climate may worsen.
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NYSE: CHWY
Key Data Points
Chewy is not a pandemic-only business
Chewy has emerged into a go-to place for over 20 million pet owners to shop for pet food, treats, toys, or really any other items they could think of buying for their pets. Chewy's expansive product catalog, its easy-to-use website, and the convenience and speed of e-commerce really resonated with pet owners.
The COVID-19 pandemic accelerated the transition of consumers from purchasing pet items in physical stores to Chewy's online shop. As COVID-19 shut down the world, Chewy grew its customer base by 43% from 13.5 million in 2019 to 19.2 million in 2020, quite an astounding jump. That big gain followed by another 8% increase in 2021, even as the effects of the pandemic began to subside.
To the surprise of many, in 2022, Chewy hasn't lost the subscribers it gained during the pandemic. In fact, the number of subscribers in the first quarter of fiscal 2022 (ending on April 30, 2022) grew another 4% over a year ago.
Chewy has proven to not be a fad. With its wide selection of over 100,000 pet products and medications, virtual healthcare, and pet insurance services, Chewy has become a one-stop-shop for pet owners, and they're sticking with it. So despite getting labeled as a pandemic play by some, smart investors looking at the numbers realize that nothing is further from the truth.
Key customer metrics point to a great future
Chewy's autoship model -- where customers can set up recurring purchases for items and get discounted prices -- and its "set it and forget it" convenience for routinely needed items is really appealing to customers. The autoship revenue has been growing consistently, and in the recently reported first quarter of fiscal 2022, it reached over 72% of the total revenue, a year-over-year increase of three percentage points. This bodes really well for Chewy's business, as autoship revenue, by its nature, is relatively sticky and reliable.
Another key point to note is that, despite all the macro headwinds and a potential slowdown in the economy, customers are spending more money with Chewy. Average sales per active customer in the recently reported quarter reached an all-time high of $446, a jump of 15% over the past year.
Finally, on average, the longer the customers stay with Chewy, the more they spend with the company each passing year. Customers who joined Chewy within the past year spent under $200 on average. That spend jumps to $400 for customers with over two years of Chewy subscription, and to approximately $700 by their fifth year. The oldest customer cohort -- those who have been members since the company's founding in 2011 -- spend about $1,000 per year. That progressive growth in customer spending highlights Chewy's ability to deeply understand its customers' needs, present most relevant offers at acceptable prices, and create an overall satisfying experience.
Overall, the growth in customers and spending per customer have resulted in growth of revenue from $4.8 billion in fiscal 2019 to $8.9 billion in fiscal 2021. The company also increased its year-over-year revenue in the recent quarter by 14% to reach $2.4 billion.
So, while some investors may get discouraged with Chewy's falling stock price, the key customer metrics point to a bullish future for the company.
Can Chewy survive a potential recession?
About 70% of the households in the U.S., amounting to over 90 million families, own a pet. And people love their pets -- in fact, most people are obsessed with them. So it's not a huge surprise that the spending on pets in the U.S. has grown every single year since 1994 (data wasn't available for prior years), and that includes the dot-com crash and the subsequent recession of 2001, as well as the global financial crisis and the following recession in 2008-2009. So even in the most difficult times, when consumers are looking to cut back their spending in all possible ways, the pet care industry has shown tremendous resilience and has been recession-proof.
And Chewy, with its sticky customer base that's spending an increasing amount with the company, seems to be in a strong position even in a declining economic environment. The company also has about $605 million in cash, which gives it a solid cushion. In fact, Chewy may be able to further extend its pet e-commerce leadership as some smaller brick-and-mortar competitors struggle with the economic downturn and rising costs.
For investors looking to protect the downside of their investments in a potential recession and also eyeing potentially excellent long-term returns, Chewy may be a stock worth taking a look at. The current drop of over 55% in its shares from their high about a year ago makes it an even more intriguing opportunity.
